RBNZ Interest Rate Decision: A Critical Juncture for Monetary Policy
Article published on February 18th, 2025 4:00AM UK Time
Market Expectations and Policy Stance
The Reserve Bank of New Zealand (RBNZ) is widely expected to continue its rate-cutting cycle on March 19 @0100 UK time. Market pricing reflects a 87% probability of a 50bps cut, while a 13% chance of a 25bps cut remains on the table. This follows three consecutive rate cuts, including a 50bps reduction in November, as the central bank signaled a commitment to easing policy in early 2025.
Governor Adrian Orr has reinforced expectations of a 50bps cut, stating that projections indicate a sharper reduction in the Official Cash Rate (OCR) than previously anticipated. While no explicit guidance was given on a larger 75bps cut, policymakers have hinted at a gradual pace of easing after February.
Economic Backdrop: Signs of Stabilisation Amid Weakness
New Zealand’s economy slipped into recession in Q3 2024, with GDP contracting by 0.8% quarter-on-quarter, exceeding expectations of a smaller decline. Inflation pressures have moderated, with the Sectoral Factor Model Inflation Index falling to 3.1% from 3.4%, reinforcing the case for further easing.
Despite recent economic weakness, analysts suggest the economy is at a turning point. Two key drivers are expected to support a recovery by late 2025:
- Impact of Rate Cuts on Households and Businesses
- Mortgage rates have fallen significantly, improving cash flow for homeowners.
- House prices are forecast to rise by 7% in 2025, supported by lower borrowing costs and improved sentiment.
- Increased consumer confidence should boost spending, encouraging business investment and hiring.
- Strength in the Primary Sector
- Commodity export prices are rising, particularly in dairy, where farmgate milk prices have reached record highs.
- The merchandise terms of trade rose 17% in 2024, with another 4% increase expected in 2025.
- Favorable climatic conditions and falling input costs provide additional tailwinds for regional economies.
Inflation and the RBNZ's Policy Path
Inflation is expected to remain well-anchored near 2% over the medium term, though a temporary uptick to 2.7% is possible due to currency weakness and rising commodity prices. However, with domestic inflation pressures easing and a softening labor market, the RBNZ is likely to remain focused on sustained disinflation rather than reacting to temporary external price increases.
The OCR is expected to reach 3.75% after February, a level some analysts view as neutral. However, the RBNZ still sees 3% as the midpoint of the neutral range, implying further cuts will follow unless economic conditions improve significantly.
Risks and Market Implications
While a 50bps cut is the most probable outcome, policymakers could surprise markets if they perceive the economy as being in deeper distress. In such a scenario, an unexpectedly aggressive cut could test the lower bounds of the NZD, acting as a buffer for exporters but raising concerns about inflationary pass-through from a weaker currency.
Conversely, slowing the pace of easing too soon could risk dampening the recovery. Some analysts argue that the RBNZ should now pause and assess the impact of prior cuts before committing to further reductions, particularly as global risks and trade uncertainties remain.
For markets, the focus will be on forward guidance—any signals of a slower or more aggressive easing path will likely drive significant moves in the New Zealand dollar, bond yields, and rate expectations in the months ahead.
